Rotten Apple Earnings — Look Out Below!

Here are 13 different takeaways from AAPL earnings and the conference call, along with short- and long-term trade ideas.

Apple (NASDAQ:AAPL) just reported earnings, and the details seem to indicate another disappointment and more trouble in the short-term for the tech giant.

Here are the Apple Q1 earnings details: Profits beat expectations, but fell slightly from last year. The trouble comes from a top-line slowdown driven by a small iPad sales miss and a substantial shortfall with its iPhones — and worst of all, margins are falling fast. The Apple EPS beat of $13.81 versus $13.34 in forecasts is good, but the decline from $13.87 in Q1 of fiscal 2012 drives home the point that the best days of this company might be behind it.

So what’s the takeaway, and what’s the trade here? Well, it depends:

Short-Term Trade: The volatility has been high, and now momentum appears to be to the downside once more. Consider buying puts to limit your risk and perhaps capitalize on a big move down. Or if you believe there’s a dead cat bounce, play a swing trade. But know this is a gut play on momentum and sentiment… so be sure your gut is right.

Long-Term Trade: I still think a price of $425 would be a bargain for long-term investors. That gives you a yield of more than 2.5% and a P/E of under 9.4. based on fiscal 2013 forecasts — which seem very likely to hold. When you back out domestic cash (worth about $48 a share by my calculations) — you get to about 8.3. Throwing overseas cash in there pushes the P/E even lower… so I would be confident going long at $425, and that’s where most technical traders see the downtrend bottoming out.

Trapped Longs Out of Luck: If you bought in late 2012 and have a cost basis of above $500 … all I can say is “sorry.” There might be no relief for you in the near-term. Momentum is working against you, and any long-term value arguments will not break through the gloom of the current spectacle. I wouldn’t sell into a downdraft Thursday morning … but you have to be realistic about the upside, too. Remember, if Apple does recover 10% from here, who’s to say you won’t make 10% in a different investment? Your portfolio’s value will be the same — even if the holdings change.

Anyway, that’s my two cents on the trade to make after the Apple earnings report. But if you’re more interested in the earnings details, here’s what I found most interesting. Some are bearish observations, some are bullish and some are both, depending on your time horizon. I’ll add more later when I have time to digest all of this in detail, but here’s the dump:

Many Products Launched, Many More to Come: Apple CEO Tim Cook took great pains to express that new product research is ongoing, and that the company continues to roll out a diverse line of products. “Apple is in one of the most prolific periods in innovation in its history,” Cook said. “Just in the last two months we’ve introduced products in every category that we make.”

Supply Issues Remain: Related to that, it appears Apple remains overstretched on the supply side thanks to massive product launches. The company went out of its way to point out that a 16% decline in Mac sales might have been impacted by “significant constraints” on supply chains, and that Apple’s laptop sales would have been stronger otherwise. CFO Peter Oppenheimer said this in the call after-hours: “If you look at the iPhone sales across the quarter, we were very constrained for much of the quarter on iPhone 5. As we produced more and shipped more, sales went up with production.” He also said Apple’s iPhone 4 line “was in constraint for the entire quarter.” It’s hard to meet demand when you can’t deliver enough goods to market … but I must add that even if it is a demand issue, maybe that’s not all that great if Apple has made a habit of overpromising and under-delivering.

Buyback Plans: The company returned about $4.5 billion in cash through buybacks and dividends in the last quarter, and execs pointed to plans to return $45 billion over three years. That’s a big number.

Cautious Guidance Going Forward: Interesting to long-time Apple watchers is the big shift in forward-looking statements that will now include a range. There was some tap-dancing on the hows and whys during the Q&A portion, but the gist is this: Before, Apple gave a single target that was “conservative”; going forward, AAPL will give a range that it expects to be within. It’s up to you to decide whether Apple is trying to subtly temper future expectations or just admitting it lowballed us on purpose in the past.

Cook Says Don’t Believe the Rumors: Cook also called out the rumor mill. While he didn’t cite any specific outlet or report, he said “it’s good to question the accuracy about any rumor” and that when dissecting supply chain blogs, “any single data point is not a good proxy for what’s going on.”

Products Trump Market Share: In response to a question about market share preservation vs. customer satisfaction, Cook didn’t equivocate much. “The most important thing is to make the best products in the world that enrich customer’s lives. We aren’t interested in revenue for revenue’s sake. We could put Apple brand on a lot of stuff, but that’s not what we’re here for.” While he doesn’t believe big market share and a great product are mutually exclusive, he firmly came down on the side of quality vs. quantity.

PC Hating: No surprise here. Apple pointed out that it continues to sell dramatically more tablets even as PC sales are in decline. Looking forward, Cook believes tablets like the iPad will keep “cannibalizing” the market and eventually eclipse PCs. The data seems to be in his corner on that call, so the iPad growth story still might be alive and well.

Investing in Supply and the Cloud: Oppenheimer pointed to $10 billion in capex this fiscal year, up almost $2 billion from fiscal 2012. About $1 billion is earmarked for retail rollouts — presumably a lot of that for China, where Apple is growing fast — but the other $9 billion includes supply equipment that Apple will own but partners will use, and data center improvements to serve its iTunes and online service arm. With the aforementioned supply concerns and the over 800,000 apps and 40 billion downloads in the App Store, this is money well spent.

Enterprise Assault: Apple bashed Android for increasing security risk and fragmentation. That might have sounded defensive, but it at least proves Apple is serious about enterprise. It called out a focus on government partnerships for iPhone use, including deals with NASA, NOAA and the TSA, among others, and big business rollouts including Volvo and Neiman Marcus, as well as an ambitious iPad scheme with Barclays IT. That’s worth noting as we close in on the BlackBerry 10 launch from Research In Motion (NASDAQ:RIMM), which is hoping for a warm enterprise reception.

One Less Week in Q1: Apple pointed out that Q1 was 13 weeks this year vs. 14 last year. So take that into account when you consider the misses.

Big Margin Risks: Apple’s Q1 gross margin was 38.6% — 2.6 percentage points higher than expected, but way down from 44.7% in the year-ago quarter. The margin hammers home the fact that Apple can’t command the same price premiums as it did in years past. And only the most naïve of investors thinks that margin will move significantly upward in the face of increased competition from low-cost phones from Samsung (PINK:SSNLF) and others. By the way, margins should slip to 37.5% to 38.5% according to the Q2 forecast. Fun stuff.

Analyst Downgrades: Remember, an attractive P/E is only such if the earnings estimates hold. If Wall Street keeps moving the bar lower, then the bears are validated. Furthermore, current upside targets average $720-plus … but if downgrades happen en masse over the next few weeks, price targets will move down, too. Sometimes the difference in estimates resolves itself by changes in targets, not changes in stock price.

iPhone 5 Sales: The biggest thing that should make investors super-worried is that iPhone sales were 47.8 million for the quarter. The hope was for 50 million units … and considering this was a global launch for the iPhone 5 instead of tiered as in the past, there are red flags about the waning Apple product launch magic. Of course, the figure was up from 37 million a year ago … for what that’s worth.

China: iPhone sales doubled year-over-year in mainland China. Also, points-of-sale were up to 17,000 from 7,000, and AAPL was clear that this is just the beginning.

Anyway, I remain an Apple long — though if the stock opens down as ugly as it looked after hours, I will officially be in the red on my position.

But as I have mentioned before, Apple stock has no middle ground — you’re either in for a few weeks or you’re in for a few years. I decided to gut it out for a few years … which I might wind up regretting, but I am fighting my very human fight-or-flight response right now and sticking with AAPL for the time being.

What’s your take on Apple earnings? Are you buying, selling, ignoring? Chime in below.

At a Glance

The margin hammers home the fact that Apple can’t command the same price premiums as it did in years past. And only the most naïve of investors thinks that margin will move significantly upward in the face of increased competition from low-cost phones from Samsung and others. By the way, margins should slip to 37.5% to 38.5% according to the Q2 forecast. Fun stuff. But I remain convinced that Apple may be a good long-term buy on a dip, especially considering the low P/E when you back out the cash.